Saturday, May 08, 2010

Thursday fallout, Cont'd...

More analysis of the strange day on the NYSE prompts this interesting idea for mitigating future problems: no market orders.
But there are other ideas to keeping computerized markets in check. Lawrence E. Harris, a finance professor at the University of Southern California, said regulators should simply require all sellers to specify a minimum price below which they do not want to complete the sale of their shares. Market orders, placed at the best available price, can be too risky in the fast-moving age of electronic trading.
On Thursday, some sellers placed orders that were not fulfilled until prices had plunged as low as a penny a share. If sellers had placed “limit orders” instead, those transactions would not have happened, Professor Harris said.
“Electronic exchanges in most other countries only accept limit orders,” said Professor Harris, a former S.E.C. chief economist. “Without any mechanisms to stop the market, we just had stocks falling through the ice.”
But Rafi Reguer, a spokesman for the electronic exchange Direct Edge, said retail investors liked market orders because limit orders could be rejected, forcing the seller to try again, in some cases at a lower price.
“Sometimes what people value is the certainty of execution,” Mr. Reguer said.
Experts also note that the value of limit orders can be subverted if investors routinely set unrealistically low limits, to avoid the inconvenience of having their orders rejected. [More]
I find it hard to believe there won't be some tinkering with the trading systems which will spill over to our world.


Anonymous said...

John, I haven't used a market order in over 10 years. IMHO they are for chumps. If you need certainty of execution set your price so that your counterparty is in the money at the current price.

Anonymous said...

Order Execution hurt Investor Confidence PIIGS hurt World Confidence

The economic situation with the PIIGS, with my limited knowledge, appears to of started with the creation of the European Union. The inability for free movement of labor within Europe (culturally limited or otherwise) created “cheap” labor zones. Investment flowed into these countries (PIIGS) to capture the cheaper labor pool. The resulting economic “boom” led to increased sending. (Fiscal restraints were required for European Union membership. This mandate seemingly lacked external control for implementation.) When the economic crisis of 2008 hit, the ability to fund the accumulated debts was lost with the resulting of lower employment levels and reduced tax flow. (It should be noted the financial problems within the PIIGS do not appear to be the same. Some countries have fiscal problems while others have consumer problems; housing “bubbles”) Many of our US States are in a similar situation.

Greek bailout may have a negative effect on US. European Center Banks seemingly had no other option to the situation. Greece, with its currency now being the Euro, lost the ability to stimulate its economy and payoff its debts with a devalued currency. The Greek bailout has boosted the dollar as it becomes a “safe haven”. This comes at a time when the US situation could use a weak currency of own, with our high unemployment and growing debt level. A low currency value makes imports, to us, more expensive and exports, to others, more extractive. This stimulates domestic growth as more home made products are used to replace “higher priced” imports and US products become more attractively price in the world market. A weakening currency is not a panacea. It tends to reduce the quality of life. Imports become more expense relative to domestic products reducing the consumers “buying power”. The cost of money tends to increase as foreign investors require compensation for currency declines. Tighter fiscal controls are also generally required to makeup lost foreign investment and to control inflation level. The reduced spending means reduced federally funded programs.

China, with its currency “tied” to the dollar, may benefit from the stronger dollar. Its economic growth has been strong, maybe too strong. A “free floating” Yuan could arguably be the strongest World currency. A strong Dollar/Yuan should provide a more “natural” slowdown in China helping to avoid inflationary problems like a “housing bubble”.

It’s not nice to fool with Mother Nature or the natural value of currencies. This artificial “pegging” of money may come back to hurt the Euro, Dollar and Yuan. The dollar has a good chance of heading lower later this year as the US needs to “bailout” the financially strapped States. This might require more restrictive economic controls in China. The Euro may become stronger against the dollar; when a “weaker” currency is needed to boost growth and “payoff’ the PIIGS bailout.

It is truly a World economy.

Big Pitcher